Plenty of Oil,Inc.purchased an oil field that is estimated to have 15,000,000 barrels of oil for $45 million in 2014.In 2014,1,800,000 barrels of oil were extracted and sold.In 2015,2,000,000 barrels of oil were extracted and sold.The oil field will have no residual value.What is the book value of the oil reserves that will be reported on the balance sheet as of December 31,2015?

Question

Quizplus · Accepted Answer

Book value of oil reserves as of December 31, 2014 = Purchase price - depletion expense 
Depletion expense per barrel = (Purchase price - Residual value) / Estimated barrels of oil 
Depletion expense per barrel = ($45,000,000 - $0) / 15,000,000 = $3.00

Depletion expense for 2014 = 1,800,000 barrels x $3.00 = $5,400,000 
Depletion expense for 2015 = 2,000,000 barrels x $3.00 = $6,000,000

Book value of oil reserves as of December 31, 2015 = Purchase price - depletion expense for 2014 - depletion expense for 2015 
Book value of oil reserves as of December 31, 2015 = $45,000,000 - $5,400,000 - $6,000,000 = $33,600,000

Therefore, the correct answer is B) $33,600,000.